[2022] KEHC 18082 (KLR)

Mawingu Networks Limited v Commissioner of Domestic Taxes (Miscellaneous Application E055 of 2022) [2022] KEHC 18082 (KLR) (Judicial Review) (6 October 2022) (Ruling)

Neutral citation: [2022] KEHC 18082 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Law Courts)

Judicial Review

Miscellaneous Application E055 of 2022

J Ngaah, J

October 6, 2022

Between

Mawingu Networks Limited

Applicant

and

Commissioner of Domestic Taxes

Respondent

Ruling

1. The applicant’s application is for leave to file a substantive motion for the judicial review orders of certiorari, and prohibition. He will also be seeking a declaratory order in the substantive motion if leave is granted. The application is dated 24 of May 2022 and it is stated to be brought under Article 47 of the Constitution; sections 7 and 9 of the Fair Administrative Action Act, 2015 Order 53 rule 1 of the Civil Procedure Rules and rule 25 of the Civil Procedure (Amendment) Rules, 2020. The prayers for these orders have been framed as follows:“a.An order of certiorari directed at the respondent to bring to this court for purposes of being quashed the decisions made by the respondent in the return review findings and demand letter for tax dated 15 December 2021 purporting to demand an amount of KES 41,710, 581. 35 (tax demand) being excise duty from the ex parte applicant;b.An order of prohibition be and is hereby issued prohibiting the respondent, its (sic) servants, agents, staff, employees and persons acting through him from issuing any further tax demands for the alleged excise duty amounting to KES 41,710,581. 44, the same being excise tax as the amount subjected to excise duty is not excisable;c.An order of mandamus compelling the respondent, its servants, agents, staff, employees and persons acting through it to immediately refund the amount of excise duty paid in error by the ex parte applicant and direct the respondent to charge excise duty on internet services only as specified under the relevant law;d.A declaration that only internet services are subject to excise duty as provided for under the First Schedule Part II (1) of the Excise Duty Act and that consequently, the excise duty the respondent seeks to charge on infrastructure is not collectible under any tax law;e.A declaration that the respondent, in issuing the tax demand for taxes allegedly ordered by the ex parte applicant has abrogated the ex parte applicant’s rights to Fair Administrative Action, as guaranteed under Article 47 of the Constitution and as provided for under sections 3, 4, 5, 6 and 7 of the Fair Administrative Action Act; andf.A declaration that the respondent’s action in issuing the tax demands for taxes not provided for in law from the ex parte applicant and insisting on payments amount to an abuse of power and is ultra vires, illegal and void ab initio.”

2. The applicant also sought for an order that if leave is granted, the same does operate as a stay against enforcement or execution of tax demands dated 15 December 2021.

3. The application is based on the statutory statement dated 24 May 2022 and a verifying affidavit sworn on 24 May 2022 by Farouk Ramji, the Chief Executive Officer of the applicant.

4. Ramji swears that the applicant is a company that connects homes, small businesses, and large enterprises to what he has described as ‘a proprietary network of towers’ using wireless and fibre infrastructure. The applicant also creates public Wi-Fi hotspots in hundreds of communities where customers can login with pay-as-you-go accounts.

5. Following the enactment of the Finance Act No. 10 of 2018, internet data services were subjected to excise duty and according to the applicant’s excise licence, it was to start accounting for the excise duty on such services from 1 October 2018.

6. The applicant’s services attract revenue on data, infrastructure, installation fees, revenue and grants. And when it offers these services, the applicant remains the owner of the infrastructure and at no point is it intended to transfer its ownership to the customer and, therefore, the customer pays a standard installation fees which is payable once at the point of installation. The customer also pays maintenance fees which is remitted monthly together with the cost of data. The monthly invoice sent to the customers, therefore, reflects two services- one for the infrastructure and the other for the internet services.

7. Since the year 2020, the applicant has been presenting invoices to its customers with the two separate line items that are priced differently. Since excise duty applies on internet data services, this is the only aspect of the invoices on which the applicant applies excise duty. The infrastructure element does not, under the law, attract excise duty.

8. By a notice of intention to issue assessment dated 18 October 2019 addressed to the applicant by the respondent, the latter contented that, from its records, the applicant had failed to declare or pay excise duty on internet services for the period between September 2018 and August 2019. It, therefore, requested the applicant to declare and pay immediately all taxes due amounting to Kshs. 13,065,791.

9. Subsequently, there were negotiations between the applicant and the respondent on resolving the dispute. However, by a ‘return review’ letter dated 13 October 2020, the respondent demanded payment of Kshs. 41,593,974/= allegedly made up of value added tax, withholding tax, pay-as-you-earn and capital gains tax. The amount was required to be paid within 14 days failure to which tax recovery measures would ensue.

10. The applicant wrote back by a letter dated 15 December 2020 giving supporting documents in response to the respondent’s demand and at the same time seeking extension of time to provide documents in support of its position with respect to the withholding tax.

11. The respondent thereafter issued a further return review letter dated 23 August 2021 demanding immediate payment of the sum of Kshs. 56,436 890/= being excise duty and withholding tax. And on 15 December 2021, the respondent issued yet another return review finding and demanded immediate payment of Kshs. 44, 210, 173. 35 and Kshs. 41,710,581. 35 being excise duty and the balance of value added tax.

12. The applicant’s contention is that under the law, internet data services are subject to excise duty and the applicant is consequently clear on the element of its fees that qualify as internet data services.

13. The applicant deposes, however, that the respondent is trying to include the infrastructure element of the services to fall within the definition of “Internet data services”. According to the applicant, this is an overreach. It is equivalent to saying that since telephone services are subject to excise duty, the telephones necessary for the telephone services are also subject to the same excise duty. The applicant contends that the two components are different and that it is only the service components that attract excise duty, going by the definition given in paragraph 1 part II of the 1st Schedule to the Act.

14. The respondent opposed the application and Gilbert Gitonga, swore a replying affidavit on 3 June 2022 to respond to the applicant’s allegations. Gitonga has described himself in the affidavit as the respondent’s assistant manager at the respondent’s Nyeri branch.

15. According to Gitonga, the respondent conducted a compliance check on the tax compliance status of the applicant and noted that the applicant had under-declared the excisable amount for purposes of payment of excise duty for the years 2018 to 2021. The under declaration was evident from the analysis of the business turnover against the turnover declared for excise duty.

16. When the applicant was tasked to explain the variance between the turnover against the amounts declared for excise duty, the applicant’s explanation was that the variance was as a result of the total turnover having the whole amount including infrastructure while the excise duty amount was limited to Internet data services only. However, the applicant could not explain what infrastructure entailed and why it was being charged separately from the alleged turnover declared. The applicant was also not able to prove that the income not subjected to excise duty was from infrastructure.

17. In assessment of the excise duty, the respondent had considered the adjustments for costs of hardware, installation and other miscellaneous income. According to the respondent, the applicant had come up with an ingenious way of reducing the amount of excise duty payable and maximising profits by separating the invoices purportedly for data services and infrastructure.

18. The respondent issued the applicant with a manual assessment dated 15 December 2022 for the sum of Kshs. 41,710,581/=. It initially had challenges with posting the assessment on the itax portal but the problem was later resolved and the assessment was posted on 20 April 2020.

19. The letter of 15 December 2021, referred to by the applicant in its affidavit, clearly stated that it was an assessment and further the applicant was advised to object to the same within 30 days if it were dissatisfied with the assessment.

20. The applicant paid the assessed amount and has since been paying its taxes on monthly basis and the respondent was surprised that the applicant could make the instant application.

21. At the hearing of the application, Ms. Chepkoech the learned counsel for the applicant, insisted that the letter dated 15 December 2021 was not an assessment and that the only assessment the applicant understood to be such was the one in the itax portal. Even then, counsel admitted that the applicant has been remitting payments in response to the demand of 15 December 2021.

22. Ms. Chelanga, the learned counsel for the respondent, on the other hand, reiterated that an assessment had been made and if the applicant was not satisfied, it ought to have invoked section 51 of the Tax Procedures Act to challenge the respondent’s decision.

23. At this stage of the proceedings, it is not open to the court to delve into the merits of what would be the applicant’s application in the event leave is granted. All that a judicial review court would ordinarily be concerned with in an application for leave such as the instant application is whether the applicant has made out an arguable case which upon further consideration may merit the grant of all or any of the judicial review orders that the applicant seeks.

24. The leave stage of the proceedings is not meant to determine whether or not the applicant’s case will succeed but whether it is arguable.

25. In IRC V National Federation of Self-Employed and Small Businesses Ltd (1982) 617, (1981) 2 ALL ER 93) Lord Diplock explained the need for leave as follows:“Its purpose is to prevent the time of the court being wasted by busy bodies with misguided or trivial complaints of administrative error, and to remove the uncertainty in which public officers and authorities might be left whether they could safely proceed with administrative action while proceedings for judicial review of it were actually pending even though misconceived.”

26. Thus, the purposes identified for leave are one, to save the court’s time and, two, so as not to leave public authorities in a state of uncertainty as to whether they can safely proceed with their operations.

27. In the same case, Lord Scarman saw the need for leave as ‘an essential protection against abuse of legal process’. In his words “It enables the court to prevent abuse by busybodies, cranks and other mischief makers”. (see pages 653 and 113).

28. On his part, Woolf LJ referred to the need for leave, in the same case, as ‘the unique statutory means by which the court can protect itself against abuse of judicial review’.

29. In order to guard against delving into the merits of the case, Lord Diplock, IRC V National Federation of Self-Employed and Small Businesses Ltd (supra) suggested the following approach.“If, on a quick perusal of the material then available, the court thinks the application discloses what might on further consideration turn out to be an arguable case in favor of granting to the applicant the relief claimed, it ought, in the exercise of a judicial discretion, to give him leave to apply for that relief.”

30. Thus, on this basis, the applicant only has to show not that it is, but that it might turn out to be, an arguable case.

31. But before considering whether the applicant has made out an arguable case the question whether there is open to it an alternative remedy which is equally convenient and effective calls for immediate attention.

32. The availability to the applicant of an alternative remedy which is equally convenient, beneficial and effective is a relevant factor in considering whether leave should be granted or whether judicial review remedies will be available eventually.

33. While it is trite that the existence of an alternative remedy is never enough to oust jurisdiction in judicial review (see Leech versus Deputy Governor of Parkhurst Prison (1988) AC 533 per Lord Bridge at 562D), it has been held in R versus Inland Review Commissioners, ex p Preston (1985) AC 835 that:“A remedy by way of judicial review is not to be made available where an alternative remedy exists…Judicial review is a collateral challenge: it is not an appeal. Where parliament has provided by statute appeal procedures, as in taxing statutes, it will only be very rarely that the courts will allow the collateral process of judicial review to be used to attack an appealable decision…”

34. Addressing the same issue in R versus Peterkin, ex p Soni (1972) Imm AR 253 Lord Widgery CJ had this to say:Where Parliament has provided a form of appeal which is equally convenient in the sense that the appellate tribunal can deal with the injustice of which the applicant complains this court should in my judgement as a rule allow the appellate machinery to take its course. The prerogative orders form the general residual jurisdiction of this court whereby the court supervises the work of inferior tribunals and seeks to correct injustice were no other adequate remedy exists, but both authority and common sense seem to me to demand that the court should not allow its jurisdiction under the prerogative orders to be used merely as an alternative form of appeal when other and adequate jurisdiction exists elsewhere.

35. Our very own Court of Appeal has held in the Speaker of the National Assembly v. Karume, Civil Application No. NAI 92 OF 1992 that where there is a clear procedure for the redress of any particular grievance prescribed by the Constitution or an Act of Parliament, that procedure should be strictly followed.

36. Thus, both the statute and precedent point to the conclusion that it is pertinent for an aggrieved party to embrace alternative remedies including appellate procedures before moving court for judicial review remedies.

37. A judicial review court will always be conscious that in considering whether a public body may have abused its powers it must not abuse its own by entertaining matters which it otherwise need not have entertained.

38. Turning back to the applicant’s application, it has been admitted, and indeed the applicant has been made on the premise that the respondent has made demands for payment of tax of certain amounts. A few paragraphs in the verifying affidavit show this to be case:“20. On 15 December 2021, the respondent issued a return review findings and demand for tax demanding immediate payment of KES 44,210,173. 35 with KES 41,710, 581. 35 being excise duty and the balance being value added tax (VAT).24. That the basis upon which the respondent now demands a sum of KES 41,710,581. 35 being excise duty is therefore unclear to the ex parte applicant.26. The tax demand issued by the respondent cannot be considered lawful or reasonable, when it clearly falls outside the purview of paragraph 1 of part II of the Excise Duty Act, 2015. ”

39. Although the applicant contended that these demands are not formal assessments against which the applicant cannot object to in accordance with the Tax Procedures Act, Ms. Chepkoech, the learned counsel for the applicant conceded during the hearing of the applicant’s application that the assessment orders of 21 April 2021 and 20 April 2022 were appealable decisions. And it is apparent from the letter of 15 December 2021 that the respondent had assessed the sum of Kshs. 44,210,173. 35 as the sum due from the applicant on account of “additional tax”. The pertinent paragraphs in the letter read as follows:“In exercise of powers conferred upon the Commissioner by section 32 (1) of the Tax Procedures Act 2015, you are required to pay the sum of Kenya shillings 44,210,173. 35 as additional tax within 30 days from the date of this letter. Assessments on itax systems shall be issued in due course and this amount payable immediately.You are informed that if you are dissatisfied with this assessment you may object within 30 days in the form and manner described in section 51 of the Tax Procedures Act 2015”. (Emphasis added).

40. Section 32(1) of the Tax Procedures Act which the letter made reference to reads as follows:32. Tax as a debt due to the State(1)A tax payable by a person under a tax law shall be a debt due to the Government and shall be payable to the Commissioner.

41. The respondent’s impugned letter would, in my humble view, fit the description of a “tax decision” which is defined in section 3 of the Tax Procedures Act to mean: -tax decision” means—“(a)an assessment;(b)a determination under section 17(2) of the amount of tax payable or that will become payable by a taxpayer;(c)a determination of the amount that a tax representative, appointed person, director or controlling member is liable for under section 15, section 17 and section 18(d)a decision on an application by a self-assessment taxpayer under section 31(2);(e)a refund decision;(f)a decision under section 48 requiring repayment of a refund; or(g)a demand for a penalty;

42. The respondent’s decision would fall under section 3 (1) (a) and (g). It was an assessment and a penalty. Under the same interpretation section “an assessment” has been defined to mean:“a self-assessment, default assessment, advance assessment, or amended assessment, and includes any other assessment made under a tax law.”

43. If the respondent made it clear that the amount demanded was an “assessment” as defined in the tax law, the applicant ought to have proceeded on the assumption that the demand was based on an assessment and hence a tax decision.

44. Having come to the conclusion that the respondent’s decision was a tax decision, the next question is whether there is any procedure in the Act for contesting such a decision by an aggrieved party. My answer to this question is in the affirmative and in this regard I find guidance in section 51 of the Act which provides for objection to the tax decision; at the material time it stated as follows:51. Objection to tax decision:(1)A taxpayer who wishes to dispute a tax decision shall first lodge an objection against that tax decision under this section before proceeding under any other written law.(2)A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.(3)A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—(a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;(b)in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1); and(c)all the relevant documents relating to the objection have been submitted.(4)Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged.(5)Where the tax decision to which a notice of objection relates is an amended assessment, the taxpayer may only object to the alterations and additions made to the original assessment.(6)A taxpayer may apply in writing to the Commissioner for an extension of time to lodge a notice of objection.(7)The Commissioner may allow an application for the extension of time to file a notice of objection if—(a)the taxpayer was prevented from lodging the notice of objection within the period specified in subsection (2) because of an absence from Kenya, sickness or other reasonable cause; and(b)the taxpayer did not unreasonably delay in lodging the notice of objection.(8)Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and Commissioner's decision shall be referred to as an "objection decision".(9)The Commissioner shall notify in writing the taxpayer of the objection decision and shall take all necessary steps to give effect to the decision, including, in the case of an objection to an assessment, making an amended assessment.(10)An objection decision shall include a statement of findings on the material facts and the reasons for the decision.(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of—(a)the notice of objection; or(b)any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.

45. What this boils down to is that the applicant ought to have lodged an objection with the Commissioner in accordance with section 51(1) of the Act. Upon considering the objection, the Commissioner would have been bound to make what is described an ‘objection decision’ under section 51(1). As the Acts states, in an objection decision, the Commissioner may allow the objection either in whole or in part, or disallow it altogether.

46. If he reached a decision contrary to the applicant’s expectation, it would still be open to the applicant to invoke section 12 of the Tax Appeals Tribunal Act, No. 13 of 2014 which provides that ‘a person who disputes the decision of the Commissioner on any matter arising under the provisions of any tax law may, subject to the provisions of the relevant tax law, upon giving notice in writing to the Commissioner, appeal to the Tribunal’. Section 13 of the Tax Appeals Act details the procedure for making of the appeal.

47. If still dissatisfied with the decision of the Tax Appeals Tribunal, the applicant would be entitled to move this court under section 32 of the Tax Appeals Tribunal Act to impeach that decision. Under this provision of the law, a party to proceedings before the Tribunal may, within thirty days after being notified of the impugned decision or within such further period as the High Court may allow, appeal to this Honourable Court.

48. Considered from the perspective of the foregoing provisions of the Tax Procedures Act and the Tax Appeals Tribunal Act, it is easy to conclude that the applicant has, to say the least, overlooked certain necessary steps before moving this honourable court for the judicial review orders of certiorari and prohibition. In doing so, the applicant has not only breached the two Acts but its application is also in breach of section 9(2) of the Fair Administrative Action Act, No. 4 of 2015 which provides in peremptory terms that ‘the High Court or a subordinate court under subsection (1) shall not review an administrative action or decision under this Act unless the mechanisms including internal mechanisms for appeal or review and all remedies available under any other written law are first exhausted.’

49. I am persuaded, for reasons I have given, that the applicant’s application is premature and, in any event, misconceived. Leave is refused and the application is hereby dismissed. I make no order as to costs. Orders accordingly.

SIGNED, DATED AND DELIVERED ON 6 OCTOBER 2022NGAAH JAIRUSJUDGE